Is Apple or Google Winning the App War?

Internet search giant Google  (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) , usually tight-lipped on such information, released a few business stats last month at its annual developer's conference. Some of the numbers bantered about just confirm what those in the know already knew. And it's just another sign that mobile operating system market share really doesn't mean anything.

Google, despite its dominance in the mobile operating system battle, stated that it paid $5 billion to app developers last year. This was only half as much as tech rival Apple  (NASDAQ: AAPL  )  did, although iOS has less than half as many monthly active users as Android (470 million vs. 1 billion). 

Source: Fortune

As someone once said in a movie from the 1970's, "follow the money". In this case, four times the money, on a per-user basis, generated by app sales is flowing to Cupertino rather than Mountain View.

What does this mean for investors in the two companies?

Apple app fever
Apple and its shareholders are currently reaping the rewards of its ecosystem and all signs indicate that this will continue.

The app business is becoming as important as some of Apple's hardware operations. The company has been reporting double-digit expansion in "services", which includes mobile app sales. Revenue there now equals that generated by Mac sales, and is catching up to that generated by the iPod where growth is declining. Apple knows where to put its money and investors will benefit from this. The company has been using some of this cash to return value to shareholders in the forms of a dividend and share buybacks.

At its own developers conference Apple announced several new programs to help expand its app business even further, and at least one of them will be probably be important to a brand new Apple product. The ecosystem looks like it is strengthening. 

HealthKit is a platform that will facilitate the development of health and fitness related apps and third-party hardware and many believe it will be closely tied to the long-awaited Apple smart watch, which is rumored to be on the way this fall. The company has been hiring medical professionals and is working with the world-renowned Mayo Clinic on the project. 

HomeKit is intended to be part of the growing Internet of Things, in which 40 billion objects might be interconnected by the year 2018. Apple is hoping to capitalize on this rapidly growing industry by offering developers tools to create apps that would control smart objects around the house. The company has gotten a jump on things already. Apple currently has partnerships with several manufacturers in this area. There is even an app available that allows the iPhone to automatically open a Kwikset deadbolt, for example. 

Google is playing around
Google's app business is not as robust as that of Apple and investors may not benefit as much from it. The typical Android user spends about $5 per year and those using iOS shell out about $21 annually on average. Developers know this and will focus on iOS when they create new apps. The apps that are better at generating revenue are likely to go to the Apple App store before Google Play and this gives Apple a head start on profits.

Google might have a hard time growing its app business in the future, even as it tries to release more products. The Android operating system is used mainly on low-end phones and the users in that market typically are not big spenders. Many do not even have credit cards for making purchases. Apple works only in the high end and reportedly has over 800 million credit cards on file in iTunes. That's plenty of money to draw from to grow its app business. 

Foolish conclusion
Analysts finally got a tidbit of data from Google regarding its app business. It appears that Apple is making more money, about twice the total amount and four times as much per user, than the search engine company. And two recent developer tools that Apple introduced, HealthKit and HomeKit, bode well for future growth in promising industries. 

Apple will win the app war in spite of the fact that Google may have won the operating system battle. Investors need to follow the money. It looks like it will flow to Cupertino instead of Mountain View.

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  • Report this Comment On July 15, 2014, at 11:53 AM, Vegasrenie wrote:

    Another problem with the Android platform (and in my opinion, probably the largest), is that it's on so many different brands of devices that any developer would have to customize his app for each piece of hardware. Obviously, since Apple controls both the hardware and the OS, the all-important consistency that developers need is already built in.

  • Report this Comment On July 17, 2014, at 4:36 PM, Mathman6577 wrote:

    @Vegasrenie: Good point. Apple does have a big advantage.

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